Sovereign Debt: A Review
In this chapter, we use a benchmark limited-commitment model to explore key issues in the economics of sovereign debt. After highlighting conceptual issues that distinguish sovereign debt as well as reviewing a number of empirical facts, we use the model to discuss debt overhang, risk sharing, and capital flows in an environment of limited enforcement. We also discuss recent progress on default and renegotiation; self-fulfilling debt crises; and incomplete markets and their quantitative implications. We conclude with a brief assessment of the current state of the literature and highlight some directions for future research.
Prepared for the Handbook of International Economics, Vol. 4. We thank Mark Wright and the editors for very detailed and useful suggestions on an initial draft. We also thank Klaus Adam, Satyajit Chatterjee, Enrique Mendoza, and Vivian Yue for helpful comments. Manuel Amador is grateful for financial support from the NSF under grant number 0952816. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.